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Failure was in regulating credit

I was intrigued to read about Andrew Fisher’s letter to the Prime Minister regarding consumer behaviour being driven by the commission-based sales structure of retail financial advice, which seems well wide of the mark.

A change in consumer behaviour has been driven by the fact that while savings (which are good for consumers) are very heavily regulated, a huge explosion in credit (which is very bad for consumers) has hardly been regulated at all.

The PM, in his former role as Chancellor, has been dependent on consumer spending to generate any growth in the economy so he is just as culpable if not more so than the banks in driving us into the credit crunch.

I see commission as just one way of being paid for financial advice. As long as customer-agreed remuneration is applied, how the client pays for advice is a matter for them to decide.

Currently, there is a significant tax benefit for paying for advice via commission as it does not involve VAT while fees are liable to VAT. I believe Chris Cummings at Aifa got it right in terms of setting out the requirements for the advisory profession as part of the RDR process, namely: 1: Increased professional qualifications. 2: Higher standards. 3: Remuneration models agreed between the adviser and the client (not third-party influenced). 4: Full disclosure of potential conflicts of interest,

This last point concerns me rather more than commission. Advisers, for example, who say they are salaried but, in effect, have variable pay dependent upon performance, would have a conflict of interest – look at what happened to Equitable Life which operated on this basis.

Advisers who receive bonuses or share options by generating particular types of business into their organisation could hardly claim they do not have a conflict of interest if their client is seeking independent advice.

The bottom line is that commission is at least clearly stated whereas many conflicts of interest are not. I suggest that an open debate on conflicts of interest would be rather more relevant to the comparison of advice and sales definitions under the RDR process than the payment of commission. This would involve full disclosure of the firm’s business practices, remuneration structures, etc, which I would suggest is a prerequisite for treating customers fairly purposes in any event.

In conclusion, as a fee-based adviser, I am agnostic about commission but I do think there is the need for a balanced debate and the business practices of many of those who claim to be fee-based do not cut the mustard when it comes to looking at the conflict issue.

Mike Fosberry

Head of financial services

Smith & Williamson

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